Finally Detroit To Default

It was a sad day for Detroit, a once proud American city but the writing has been on the wall for quite some time. Eventually on Friday it was announced that it would stop making payments on $2.5 billion of its total $17 billion dollars of outstanding debt. Kevyn Orr, the Emergency Manager for the City of Detroit, presented to the City’s creditors the plan ahead for Detroit’s future.

Detroit said Friday

it would stop making payments on about $2.5 billion in unsecured debt and ask creditors to take about 10 cents on the dollar of what the city owes them in a move to avoid what bankruptcy experts have said would be the largest municipal bankruptcy in U.S. history.

Detroit Emergency Manager Kevyn Orr spent two hours with about 180 bond insurers, pension trustees, union representatives and other creditors outlining his plan for the city’s financial future, which includes a moratorium on some principal and interest payments, Reuters reported.

Under his proposal, underfunded pension claims likely would get less than the 10 cents on the dollar.

An assessment of the plan’s progress will come in the next 30 days or so.

Orr also announced that Detroit stopped paying on its unsecured debt Friday to “conserve cash” for police, fire and other services in the city of 700,000 people. The debt not being paid includes $39 million owed to a certificate of participation.

“We will not pay that today,” Orr told reporters after the meeting with creditors at a hotel at Detroit Metropolitan Airport in Romulus.

More than 42 percent of Detroit’s 2013 revenues went to required bond, pension, health care and other payments. If the city continues operating the way it had before Orr arrived, those costs would take up nearly 65 percent of city spending by 2017, Orr’s team said.

The team also said the proposal presented Friday is the one shot to permanently fix fiscal problems that have made the city insolvent.

“We’re tapped out,” Orr was quoted by WWJ-TV as saying. “We need to come up with a plan to restructure our debt obligations and our legacy obligations going forward — that is: pension, other employee benefits, health care, so on and so forth.”

Orr said everyone involved needs to come to grips with Detroit’s dire financial situation that has been worsened by years of procrastination and denial. He said his team is prepared for potential lawsuits from creditors not pleased with the arrangements under the plan.

“If people are sincere and look at this data, you would think a rational person will step back and say, ‘This is not normal … but what choice do we have?'” Orr said.

James McTevia, president of the Detroit-area turnaround firm McTevia and Associates, said once Orr had creditors’ attention Friday, he “drew a line in the sand and said everything behind here is frozen.”

“And going forward he is positioning the city of Detroit in a place where it can pay for goods and services without going into debt,” McTevia said.

Detroit’s fiscal nightmare didn’t occur overnight. It’s been decades in the making as city leaders took out bonds at high interest rates to pay bills Detroit’s general fund couldn’t cover.

“The average Detroiter has to understand this is a culmination of years and years of kicking the can down the road,” Orr said. “We can’t borrow any more money. We started borrowing from our own pension funds.”

The city’s budget deficit could top $380 million by July 1. Orr believes Detroit’s long-term debt is more than $17 billion.

The Washington-based bankruptcy attorney hired by Michigan in March reiterated that the chances of bankruptcy are 50-50 for Detroit, the largest U.S. city placed under state oversight.

Orr is nearly three months into the 18-month job. With little time remaining on his contract, there is no time to lose. The plan creditors received in the closed-door meeting may be the only one they get.

“There may be some room for negotiations, but not a lot,” Orr told reporters. “They need to have some time to digest what they have.”

Swallowing the proposal will be tough, especially for current and retired city workers whose health care and other benefits, as well as pensions, would be cut back.

“The firefighters are going to do what we can to keep the city stable now,” Detroit Fire Fighters Association President Dan McNamara told reporters after Friday’s meeting with Orr.

McNamara said creditors were told by Orr that “we’re in a death spiral.”

The city will not be able to back up some promises related to pension and post-employment health care and benefits. Orr is proposing a $27 million to $40 million health care replacement program that will partially rely on the federal Affordable Health Care Act, health exchanges and Medicare.

He also said $1.25 billion will be set aside from concession savings over 10 years for public safety, lighting and eliminating neighborhood blight. Improving the quality of life in the city will help attract more residents and businesses, which Orr’s team says would bring more tax revenue and increase the potential for creditors to recover more of what they are owed.

Creditors were told about plans to possibly change management of Detroit’s revenue-generating Water and Sewerage Department. A separate, freestanding authority would control the department, with some annual payments coming to Detroit and the city maintaining ownership of the system.

On Friday, Moody’s Investors Service downgraded a number of Detroit bonds, including its general obligation unlimited bonds. As a result, all Detroit bonds are now below investment grade.

Hetty Chang, a vice president with Moody’s, said “the emergency manager’s proposal to creditors indicates further debt restructuring.”

“We also believe the city’s risk of bankruptcy has increased over the last six months,” she said in a statement.